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Using MSAs to Benchmark Compensation

#Culpepper and Associates Inc.

By Culpepper and Associates Inc.Jun 3, 2011

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One popular method of analyzing compensation by geography in the U.S. is using Metropolitan Statistical Areas (MSAs) based on the geographic classification system used by the U.S. Department of Labor (DOL) and Bureau of Labor Statistics (BLS). While MSAs are commonly used for determining geographic pay differentials, they were not specifically designed for compensation analysis and are not appropriate to use for all U.S. metro areas.

The analysis below highlights three large metro areas in the U.S. where pay rates are not uniform within the corresponding MSA and solutions for benchmarking geographic pay differences in these markets.

Pay Rates Not Uniform for All MSAs

Culpepper and Associates' annual analysis of technology and life science industry wages in the U.S. reveals that pay levels for most MSAs are similar for the core city and combined adjacent counties. However, significant disparities in pay can occur in large metropolitan areas that contain distinct social, economic and cultural areas.

There are three major metro areas in the U.S. where there are significant differences in pay within the corresponding MSA:

• San Francisco:San Francisco-Oakland MSA

• Seattle:Seattle-Tacoma MSA

• Chicago:Chicago-Naperville MSA

An alternative and more precise method to using MSAs for benchmarking pay in these markets would be using specific Metropolitan Divisions (DIVs) within each MSA. A Metropolitan Division is a locale within a large MSA. Divisions provide the most precise geographic pay rates within large metro areas.

San Francisco-Oakland MSA

Parts of the San Francisco Bay Area have the highest market wage levels in the United States.

Pay rates in Oakland are considerably lower than San Francisco. If data from Oakland are combined with data from San Francisco, as the San Francisco-Oakland MSA does, it will erroneously inflate market data for Oakland and deflate market data for San Francisco.

Solution: Use either the CA: Oakland DIV or the CA: San Francisco DIV data cut to view the most appropriate market data (Figure 1).

Seattle-Tacoma MSA

Analysis of data from participants in the Seattle-Tacoma area reveals that pay levels in Tacoma are significantly less than pay levels in Seattle. If data from Tacoma are combined with data from Seattle, as the Seattle-Tacoma MSA does, it will erroneously inflate market data for Tacoma and deflate market data for Seattle.

Solution: Use either WA: Seattle DIV or the WA: Tacoma DIV (Figure 2).

Chicago-Naperville MSA

Pay rates in Lake County, Ill., and Kenosha County, Wis., are higher than other areas in the Chicago-Naperville MSA.

Solution: Use either the IL: Lake County DIV, the IN: Gary DIV or the IL: Chicago DIV data cut to view the most appropriate market data.

Compensation for specific jobs in local markets can vary and be impacted by a variety of factors, including company size, industry sector, talent availability, cost of living and health of local economies.

Compensation professionals should consider carefully differences within markets they are benchmarking and make sure they are not mixing locations with different pay rates.